Demonetisation: Sales of home developers to fall 20-30% next year, says Fitch

Leverage of top builders to rise in 2017

Rating firm Fitch Ratings expects residential property sales of most of the residential developers to come down by at least 20-30% in 2017, because of the government's move to demonetise certain currency notes.

"...government’s move in November 2016 to curtail undeclared wealth by demonetising certain currency notes is likely to take a toll on demand. Property and gold are popular instruments for investing undeclared income in India’s large cash-based economy," it said.

Fitch expects the credit profiles of most residential developers  to weaken as slower sales could mean cash collections will lag construction commitments. "This would be Particularly true for companies that have aggressively expanded their land banks in the last two years, using cash collections from previously sold properties. On the other hand, companies that have the liquidity to complete their projects within the next three to six months may be temporarily insulated from the shock," Fitch said.

Fitch said it expects leverage (defined as net debt/adjusted inventory) of the seven large developers considered in the report to increase in 2017, from around 87%  at end-March 2016 (FY 16) and 82% in FY 15.

Aggregate sales of these seven companies fell by 3% to Rs 2,36,500 crore during FY16. Sales of Prestige Estates, DLF, and Lodha Developers were weaker than average, while Godrej Properties and Indiabulls Real Estate (IBREL ) recorded strong growth, it said.

Fitch said the ratings of IBREL and Lodha may weaken in 2017, as both have high leverage for their current ratings. IBREL’s leverage stood at 55% at end-June 2016, close to the 60% threshold beyond which we may consider negative rating action. Lodha’s leverage was 84%  at the same date, it said.

"The Negative Outlook on Lodha’s rating reflects the challenges it may face in reducing leverage to less than 80% in the next 12-18 months,' it said.

Fitch expects unsold inventory to increase in 2017 as a result of weak demand, particularly in the National Capital Region (NCR) — which we believe has the most significant cash-based economy.

"Industry data shows that the NCR had the highest unsold inventory – of around 16 quarters of sales as of June 2016 — while unsold inventory in Mumbai and Chennai was lower at around 10 and seven quarters of sales, respectively," it said.

It said the decline in home prices is likely to be more pronounced on sales of higher-end, premium property which is targeted by high-net-worth individuals and investors, rather than entry-level housing sought by first-time homebuyers and which are more often purchased by salaried individuals with limited undeclared income.

"A sharp correction in property prices may support a revival of demand over the longer term," it said.